Credit growth suffers as debt & CP steal the show

Benign yields in the corporate bonds and commercial paper market are allowing companies to pick up money for both short- and long-term needs, leaving the loan growth at banks muted. Bank credit shrank 3.16% between April and July, and saw a single-digit growth of 9.65% y-o-y, show RBI data. RK Takkar, the executive director at […]

Benign yields in the corporate bonds and commercial paper market are allowing companies to pick up money for both short- and long-term needs, leaving the loan growth at banks muted. Bank credit shrank 3.16% between April and July, and saw a single-digit growth of 9.65% y-o-y, show RBI data.

RK Takkar, the executive director at Dena Bank, says one cannot expect a major pick-up in credit growth in the near term, but a double-digit growth may be possible by the fiscal end.

“By the end of this fiscal, you may see the non-food credit growing by as much as 12-15% y-o-y,” he added.

Companies have raised Rs 1.69 lakh crore through the corporate bond market in the first four months of the current fiscal, which is more than three times what they raised in the same period in FY14.

A report by IIFL Institutional Equities says that in FY15, just 60% of incremental credit to private sector was met through bank against an average of 75% in the last four years. “In the first quarter of FY16, the share of bank loans in incremental credit flow fell further to just 50%,” it said.

The commercial paper market has also seen a boom with the total amount raised in the first four months of this fiscal being close to Rs 5 lakh crore, though a reasonable part of the amount can be attributed to rollovers. Firms also mopped up $6.28 billion from April to June through external commercial borrowings.

Bankers assert that corporate credit growth remains muted and may take some time to see any signs of revival. “The growth in credit is driven mainly by the retail and MSME side as of now. Corporate credit growth remains muted and we are not seeing any fresh requests for project financing. However, it may see some pick-up in the fourth quarter of FY16 onwards, and the result will start reflecting from the first or second quarter of FY17,” Takkar added. Yields in the money market and corporate bond market have seen considerable softening ever since the Reserve Bank of India cut the repo rate by 75 basis points in 2015.

A AAA-rated public sector unit company can raise funds through long-term bonds at a rate close to 8.50-8.60% while the lowest base rate in the banking system as of now stands at 9.70%.

This difference of 110 basis points explains why companies — at least those that can access funds in the corporate bond market — are reluctant to approach banks for borrowing purposes.

Ajay Manglunia, senior vice-president, fixed income at Edelweiss Securities, says the current spread of 110 bps between loan rates and corporate bond yields could take six months to narrow down to levels closer to 80-90 bps.

“This spread would be way too attractive for companies and any reversal to bank borrowing on a large scale is unlikely in the near term,” Manglunia added.

On commercial paper, a firm with a good rating can issue two to three month paper at a rate close to 7.6-7.70%. The IIFL report adds both corporate bonds and commercial paper market have seen a big upswing in the last few quarters. “Their share of total incremental credit flow has increased to 30% and 9%, respectively, in FY15. In the last few years, the share of corporate bonds was less than 20% and commercial papers were a negligible source of domestic credit flow,” says the report.